Big deals provide coal comfort for investors by: Matt Chambers...

Big deals provide coal comfort for investors

by: Matt Chambers
From: The Australian
December 24, 2011 12:00AM

ALTHOUGH coal stocks might not have gone so well in the past 12 months, this year has been a great one for those who make their cash putting together deals in the sector.

Capping off a record year for coal deals, in the past fortnight the two biggest pure-play coal stocks on the Australian Securities Exchange, Macarthur Coal and Coal & Allied, were delisted as majors Peabody Energy and Rio Tinto continued the consolidation of the Australian industry, leaving only New Hope and a smattering of smaller coalminers for local investors.

But in the new year, a couple of multi-billion-dollar deals stand to boost mid-tier options for coal investors.

China's Yanzhou Coal yesterday confirmed that the mines it removed from the Australian bourse in 2009 with its $3.3 billion takeover of Felix Resources would probably be returned after a $2.1bn takeover of Gloucester Coal.

If successful, the plans would create what would be the nation's biggest stand-alone listed coal company, with a market value of $6.1bn.

This deal comes on the heels of Nathan Tinkler's agreed $2.1bn scrip sale of Aston Resources to Whitehaven Coal earlier this month to create a $5.1bn coalminer.

According to Bloomberg data, in the past year there have been $19.5bn worth of completed and pending coal deals involving Australian companies, including Rio's takeover of Mozambique-focused Riversdale Mining.

If you add the potential sale of New Hope, which has put itself on the auction block and is reportedly in the sights of Indian buyers, this figure could grow beyond $25bn in coming months.

The surge in activity is not hard to explain. Despite huge uncertainty in financial markets, all forecasts for coal-fired power and steel demand continue to predict big growth in the sector.

And for those with deep pockets and a future need for coal, it is a good time to buy.

Gloucester shares, for instance, were trading 58 per cent higher a year ago than they were last week, before they went into a trading halt before the Yanzhou deal announcement.

The chairman of listed mining fund Global Mining Investments, John Robinson, says he does not see the consolidation of the industry slowing.

"There are two main reasons for this," says Robinson, who also chairs crane contractor Boom Logistics.

"The first is the fact that India and China are looking to secure interests in the resources that are most important to them. The second factor is that we have an industry with an appetite for expensive infrastructure, so economies of scale are important."

Robinson's second point is easily illustrated by looking at the frontier Galilee Basin of Queensland. To be economic here, new mines need to be big, and owners have offered to build their own railways and ports.

In the basin, India's GVK bought 79 per cent of Gina Rinehart's Queensland coal interests this year for $1.2bn, while last year India's Adani paid $500 million and a 2 per cent royalty to Linc Energy for the Carmichael project.

Both companies are looking at $10bn-plus spends to develop their mines and infrastructure.

For investors, Yanzhou's takeover of Gloucester is set to bring a $6bn company with aggressive growth plans to the sharemarket.

That said, the free float will at least initially be limited, with the Chinese to hold a 77 per cent stake and Gloucester's biggest shareholder, Noble, to hold about 15 per cent.

So where should those who want to invest in coal turn?

Credit Suisse analyst Paul McTaggart says investors should look at the smaller end of the sector, in particular Cockatoo Coal and Bathurst Resources.

"While we acknowledge Cockatoo has near-term funding issues which need to be addressed, in our view Cockatoo has a cheap, attractive acreage position, close to proposed infrastructure and strong takeover appeal," McTaggart says.

Credit Suisse has a target price of 65c for the Queensland-focused Cockatoo, shares of which closed yesterday at 37.5c.

Bathurst, which is focused on mining coking coal in New Zealand, has the potential to produce up to 2 million tonnes of coking coal a year for fairly low development costs, but faces the risk of project delays, McTaggart says.

Credit Suisse has a $1 target price on Bathurst, whose shares last traded at 63.5c.

GMI's Robinson says the consolidation of the Australian coal industry is ultimately a good thing for investors because the rationalisation will enable more coal to get to market.

"While a lot of smaller players are getting swallowed up, from the point of view of a realistic end point, this makes sense for investors," Robinson says.

"I think consolidation in the mining industry will continue, most particularly in coal and iron ore, but also in base metals like copper."

http://www.theaustralian.com.au/business/mining-energy/big-deals-provide-coal-comfort-for-investors/story-e6frg9df-1226229712052